In a great post earlier this year, VC Pascal Bouvier (along with Aldo de Jong and Harry Wilson) deconstructed the idea that starts-ups always equate to successful innovation.
Before you jump on the lean start-up bandwagon, realize the success rate of a start-up taking ideas to market is about 0.2%. Those slow-moving, monolithic corporations that don’t realize they’re the walking dead? Well, they’re notching a 12.5% hit rate. Sure, they’re not disrupting the universe, but they are protecting their profit margin, and that’s the whole point.
The problem, Bouvier states, is one of context. Start-ups serve a purpose. So do big corporations. But it’s important to realize the context in which they both belong. We are usually too quick to adopt something that appears to be working without understanding why. We then try to hammer it into a place it doesn’t belong.
Start-ups are agents in an ecosystem. Think of them like amino acids in a primordial soup from which we hope, given the right circumstances, life might emerge. The advantage in this market-based ecosystem is that things move freely, without friction. Agents can bump up against each other quickly and catalysts can take their shot at sparking life. It's a dynamic system.
Start-ups are lean and fast-moving because they have to be. That's the blueprint for their survival -- but also the reason why the success rate of any individual start-up is so low. The market is a Darwinian beast, red of tooth and claw. Losers are ruthlessly weeded out.
A corporation is a different beast that occupies a different niche on the evolutionary timeline. It is a hierarchy of components that have already been tested by the market and assembled into a replicable, successful entity. It is a complex organism which has discovered rules that allow it to compete in its ecosystem as a self-organized, vertically integrated, hopefully sustainable entity. In this way, it bears almost no resemblance to a start-up. Nor should it.
This is why it’s such a daunting proposition for a start-up to transition into a successful corporation. Think of the feat of self-transformation that is required here. Not only do you have to change your way of doing things; you have to change your very DNA. You have to redefine every aspect of who you are, what you do and how you do it.
If you pull out your perspective dramatically here, you see that this is a wave. Call it a Schumpeterian Gale of Creative Destruction, call it a Kondratiev Wave, call it whatever you like. This is not simply a market adaptation, but a phase transition. The rules on one side of the wave are completely different than on the other side, just as the rules of physics are different for liquids and gases. And that applies to everything, including how you think about innovation.
We commonly believe start-ups are more innovative than corporations. But that’s not actually true. It’s the market that is more innovative. And that innovation has a very distinct characteristic. It comes from agents who are immersed in a particular part of the market. As Bouvier points out in his post, start-up CEOs solve a problem that’s “right in front of their nose.”
Think of the typical start-up founder. They are ear-lobe deep in whatever they are doing. From this perspective, they see something they believe to be a need. They then set out to create a new solution to that need. This is the sense-making cycle I keep talking about.
For a lot of start-ups, sense-making is ingrained. The entrepreneur is embedded in a context that allows them to make sense of a need that has been overlooked. The magic happens when the switch clicks and the need is matched with a solution. Entrepreneurs are the synaptic connections of the market, but this requires deep immersion in the market.
There’s something else about this immersion that’s important to consider: There is nothing quantitative about it. It’s organic and natural. It’s messy and often chaotic. It’s what I call “steeping in it.” I believe this is also important to innovation. And it’s not just me. A recent study from the University of Toronto shows that creativity thrives in environments free of too much structured knowledge. The study authors note, “A hierarchical information structure, compared to a flat information structure, will reduce creativity because it reduces cognitive flexibility.”
Innovation requires insight, and insight comes from being intimately immersed in something. There is a place for data analysis and number crunching -- but, like most things, that’s the other side of the quant/qual wave. You need both to be innovative.